Source, Nomura offer private equity exposure in liquid ETF format

Source, a leading London-based provider of exchange-traded funds (ETFs), has teamed up with Asian investment bank Nomura to unveil an innovative new ETF which aims to match the returns of investing in private equity buyout funds through exposure to listed, public-market instruments.

Listed on the London Stock Exchange, the newly launched Source Nomura Modelled PERI UCITS ETF (PERI) has a lower minimum investment than traditional private equity funds and, like all ETFs, can be bought and sold on exchange, throughout the trading day.

The fund is linked to the performance of the Nomura QES Modelled Private Equity Returns Index (PERI). Introduced by Nomura in December 2012, the PERI was the first daily investible index to target returns similar to those which may be achieved through a global broad-based investment in private equity buyout funds on a committed capital basis.

The index was developed in collaboration with sub-adviser and quantitative think tank Quantitative Equity Strategies (QES) and is based on data provided by Preqin, a leading source of data and intelligence for the alternative asset industry.

The index does not invest in buyout funds directly or indirectly but has been developed on a foundation of private equity research which suggests that a substantial portion of private equity buyout fund returns can be attained through an investment in so-called ‘public market equivalents’ of the private investments made by those funds.

The index implements this theory through a proprietary systematic model which uses financial algorithms to allocate on a weekly basis to these public market equivalents, which can include a combination of US large- and mid-cap equity sector indices (such as those based on the S&P 500 and S&P MidCap 400 indices), and cash of varying major currencies.

The overall performance of the index is intended to target both the returns of capital actually invested in the private equity buyout fund universe as well as a risk-free rate of return on the proportion of capital awaiting deployment.

Matthew Peakman, Managing Director, Head of Fund Derivatives Trading at Nomura, said: “Private equity has consistently delivered greater returns than many other asset classes. However, certain characteristics of the market, including long lock-up periods, a lack of transparency and large minimum investments are drawbacks for many investors. PERI targets private equity-type returns, but in a transparent, liquid and cost efficient manner.”

Ted Hood, CEO of Source, added: “For many investors, private equity is interesting but inaccessible. This product is the first to provide exposure to PERI – an accessible alternative to private equity – in a robust, transparent ETF wrapper.”

As well as appealing to sophisticated investors previously unable to invest in buyout funds, the fund may find significant use amongst institutional investors seeking to synthetically equitize committed but uninvested buyout capital. According to Preqin, this uninvested capital, known as ‘dry powder’, stood at approximately $366 billion globally as of May 2013. North America-focused private equity buyout funds had the highest amount of dry powder, with some $187 billion of pledged capital uninvested. Source could be on to a winner if just a fraction of this cash finds its way into the new fund.

However, the fund is not cheap, at least not when compared to most ETFs. Firstly, there is the annual management fee, which comes in at 0.30%. Then there is an implicit 1% per annum index fee plus implementation costs of 0.05% per annum on notional equity sector transactions and 0.40% per annum on the portion of the index allocated to equity sectors.

The fund trades in USD. The minimum investment is one share, which as of launch date equates to $12,000.